Walgreen Reminded of Europe Risks With Docmorris Flop

By Allison Connolly -
Oct 11, 2012

As Walgreen Co. (WAG) spends $6.7 billion
on a foray into Europe, a small German online pharmacy offers a
reminder about the potential pitfalls.

Ralf Daeinghaus sold his DocMorris online pharmacy to
Celesio AG (CLS1) in 2007 for about 200 million euros ($258 million),
and the buyer set in motion an expansion plan to bring lower-cost drugs to more European consumers. Five years later, Celesio
has written down the value of DocMorris to 40 million euros and
put the business up for sale, stymied by laws against corporate
ownership of drugstores.

With medical costs rising and Europe’s governments cutting
spending amid the debt crisis, the idea of increased competition
in health-care retailing should be more appealing than ever. Yet
Daeinghaus’s entrepreneurship ran up against the political clout
of German pharmacists and European opposition to a freer market
in medicine sales. Walgreen, the largest U.S. drugstore chain,
bought 45 percent of Alliance Boots GmbH in August, with the
option to buy the remainder.

“It’s really crazy, isn’t it?” Daeinghaus, 45, said as he
sat in a coffee shop this month near his office in Dusseldorf.
“It’s not a problem to liberalize the market a bit. When
there’s competition, there are price and quality improvements.”

In Germany, Europe’s biggest market for pharmaceuticals, it
is a problem. Each of the 27 European Union countries sets its
own rules for pharmacies, and Germany, France and Italy have the
most stringent. Under German law, an “apotheke” or drugstore
must be owned by a pharmacist, and no pharmacist can own more
than four stores, which must be located near each other. The
government limits the profit margin pharmacists can earn.

Pharmacy Lobby

“In Germany the pharmacies have a very strong lobby,”
said Bjoern Weber, a research director for Planet Retail in
Frankfurt. “They are still seen in the public opinion as a
guarantee against counterfeiting or getting the wrong product.”

That means Deerfield, Illinois-based Walgreen, which is
seeking to become a global pharmacy company, must steer clear of
a big swath of Europe. Alliance Boots, based in Zug,
Switzerland, operates 3,200 pharmacies in the U.K., Norway,
Ireland, the Netherlands and Lithuania, and a wholesale business
that supplies 170,000 outlets.

“Much of Walgreen’s expansion in the region is limited,”
Ross Muken, an analyst at International Strategy & Investment
Group in New York, said in an e-mail Oct. 10. “The mom-and-pop
pharmacies basically block the entry of large chains.”

Open Markets

Alliance Boots has focused on areas with more open markets
such as the U.K, and Walgreen may look to expand in eastern
Europe, China and Brazil, said Muken, who has the equivalent of
a sell recommendation on Walgreen shares.

Walgreen Chief Executive Officer Greg Wasson told analysts
on a Sept. 28 conference call that Alliance Boots gives Walgreen
“the opportunity for expansion beyond the U.S. and Europe.”
Walgreen has an option to buy the remaining 55 percent of
Alliance Boots over the next three years.

Walgreen declined to elaborate on previous comments by
executives, Michael Polzin, a company spokesman, said yesterday
by e-mail.

Daeinghaus tried to work around German restrictions in
founding DocMorris. He set the company up in the Netherlands in
1999 because a German online pharmacy retailer at the time was
verboten, a restriction the country eased in 2004. When he
expanded into bricks-and-mortar stores by opening a DocMorris
pharmacy in the German state of Saarland, pharmacists sued in
2006, saying it broke the law on ownership.

Having exhausted his marketing euros on lawyers and
lobbyists, Daeinghaus sold the company to Stuttgart, Germany-based Celesio in 2007. He now runs a Kunesto GmbH, a company
that offers excursions. In announcing the deal, Celesio Chief
Executive Officer Fritz Oesterle said it would be just a matter
of time before markets such as Germany opened up to competition.

Court Ruling

In May 2009, the European Court of Justice upheld a ban on
retailers owning pharmacy chains in Germany and Italy in a suit
brought by a German pharmacy trade group. Similar bans in at
least 10 other countries were at stake in the decision.

German pharmacists are unapologetic. “A neighborhood
network of independent pharmacies in an aging society is not a
luxury, but something we need,” said Heinz-Guenter Wolf,
president of the ABDA, an association representing German
pharmacists.

To get around the ban on pharmacy chains, Celesio sold the
DocMorris brand to pharmacists as a franchise.

To be sure, Celesio may not have been the best owner for
the business. The company is Germany’s biggest wholesaler of
pharmaceuticals, so pharmacists viewed it as a supplier and a
competitor at the same time.

Sale Process

Oesterle left Celesio in 2011, and his successor, Markus Pinger, said in March that the company would sell DocMorris to
end the conflict with its pharmacist customers. Celesio has
received interest from private-equity firms and companies in the
industry, and hopes to strike a deal by the end of the year,
Chief Financial Officer Marion Helmes said in August.

Celesio declined to comment this week on the sale process,
and declined to make an executive available to comment on the
company’s experience owning DocMorris.

Celesio had 160 DocMorris-branded pharmacies in Germany at
the end of 2011, according to its annual report, and they will
return to independent ownership after the sale. The company is
committed to operating pharmacies in other parts of Europe and
had 2,281 retail pharmacies in seven countries including the
U.K. and Norway at the end of 2011.

As of August, German Internet and mail-order pharmacies are
no longer allowed to offer a discount on prescription drugs and
must offer the same price as bricks-and-mortar stores. The ban
on rebates eliminated an incentive for Germans to go online for
medicine, said Weber, the Planet Retail analyst.

German consumers are accustomed to life without corporate
pharmacies, he said.

“People are aware that the prices are higher,” he said.
“In Germany we have a saying about ‘Apotheke prices.’ If you
are at a restaurant and they charge you too much, we say these
are ‘Apotheke prices.”’